Bharat Forge Ltd Q2FY20 Results Update – Performance disappointed on all fronts

09 Nov
Concern

Bharat Forge Ltd Q2FY20 Results Update – Performance disappointed on all fronts

Bharat Forge Ltd Q2FY20 Results Update – Performance disappointed on all fronts

Misses

·         Net revenue observed a sharp decline of 25% yoy to INR 1259 cr in Q2FY20, which was 7-8% below expectation. Sharp drop of 37% yoy in CV and 29% yoy in industrial business pulled down topline.

·         Businesses across all geographies were severely impacted because of slowdown across all major markets. India business was down 37% yoy, while Europe and America was down by 25% and 17% respectively. APAC was the only market which saw a growth i.e. 26% yoy.

·         EBITDA came in at INR 320 cr, a decline of ~26% yoy. Company’s efforts to reduce overheads coupled with softening in commodity prices prevented margins from sharp decline despite of negative operating leverage. EBITDA margins were down by marginal 45 bps yoy to 25.4%.

·         Compared to expectation, EBITDA was down by ~12% and EBITDA margin was lower by 86 bps.

·         PAT came in at INR 245 cr. Lower tax outgo post change in corporate tax rate and higher other income benefited.

Hits

·         Bharat Forge PV business has started gaining strong traction. This business has almost doubled in last two years. Even in the midst of sharp slowdown across businesses, PV business stood at INR 218 cr clocking strong growth of 21% yoy.

·         Despite sharp drop in the topline and significant negative operating leverage, company was able to control the operating cost and keep EBITDA margins at healthy levels

Valuations

·         At CMP of INR 427, the stock is trading at 20x of FY21E EPS

Key concall highlights

·         Management expects H2FY20 to be weaker than H1FY20 due to prevailing slowdown in India, North America and Europe markets.

·         Management highlighted domestic CV industry has been impacted because of three key factors, 1) Increase in axle load, 2) slowdown in economic activity, 3) transition towards BS VI, leading OEMs to focus on inventory correction.

·         North America Class 8 production to peak out in CY2019 and is expected to decline by 20-25% in CY2020, while Europe market is expected to drop by 8-10% yoy in CY20.

·         Management indicated industrial business is seeing some revival driven by defence and agriculture equipments.

·         PV business across all the geographies is witnessing strong performance. Company is adding new clients, and increasing wallet share in existing clients in domestic, Europe and North America markets.

·         The new aluminium forging plant in Europe is expected to start from December 2019 and revenue potential from the plant is INR 200cr from phase 1.

·         Company is also setting up aluminium forging facility in US, which is expected to have revenue potential of USD 70-75 mn from FY21.

·         Current utilization level is around 50%. And management continues to work on enhancing balance sheet and free cashflow position.

·         Capex for FY20 is expected to be ~INR 150-160 cr for domestic business and overseas capex includes USD 60 mn for FY20-22

Our View

·         Bharat Forge result were disappointing in Q2FY20, however given the challenging environment that led to 25% yoy drop in topline, company’s ability to keep the margins intact at same level as previous year was encouraging. Management comments on weaker H2FY20 compared to H1FY20, sharp decline estimation in N American heavy truck market, sluggish European truck market and domestic CV going through structural slowdown in concerning. Although strong growth in PV business was comforting, we believe in sluggish demand scenario both in domestic and export market will keep stock under pressure in near term.

Financials

  2QFY20 2QFY19 YoY (%) Q1FY20 QoQ (%) H1FY20 H1FY19 YoY (%)
Revenue (INR cr) 1259 1679 -25.0% 1347 -6.5% 2,606 3,159 -17.5%
Gross Profit (INR cr) 754 1023 -26.3% 848 -11.1% 1,602 1,968 -18.6%
Gross profit margin (%) 59.9% 60.9% 63.0% 61.5% 62.3%
Other expenses (INR cr) 312 467 -33.2% 375 -16.8% 687 860 -20.2%
% sales 24.8% 27.8% 27.8% 26.4% 27.2%
EBITDA (INR cr) 320 434 -26.3% 350 -8.4% 670 863 -22.4%
EBITDA margin (%) 25.4% 25.9% 26.0% 25.7% 27.3%
PAT (INR cr) 245 227 7.7% 174 40.7% 419 462 -9.3%
PAT margin (%) 19.4% 13.5%   12.9%   16.1% 14.6%  

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